What Are Debit Spreads and Credit Spreads?

When you execute an option trading strategy that involves buying and selling more than one kind of option, then you are in essence, putting on one what is called a "Spread". The Spread that you put on falls into one of these 2 categories in terms of capital outlay: Debit Spread or Credit Spread.

A Credit Spread is when a high premium option is sold and a low premium option is bought on the same underlying security. When you put on a credit spread, you profit primarily from the difference between the time decay of the high premium option and the low premium option. You will also end up with more cash in your account after putting on the spread, hence a "Credit" to your account. This credit to your account is where the term "Credit Spread" comes from. Yes, you got me right, instead of having to pay money for putting on a credit spread, you are GIVEN money for putting on the credit spread. As a credit spread involves a credit to your trading account, it is usually not a strategy that traders can do without a huge cash margin. Many online brokers require a trader to have a cash balance of at least $100,000 before one is allowed to do a limited number of credit spreads. Another important feature of credit spreads is that they are able to profit if the underlying asset stays stagnant through the decay and expiration of the more expensive short options. This is something not all debit spreads are capable of.

Read the full tutorial on Credit Spreads.

A Debit Spread is when a low premium option is sold and a high premium option is bought. This is the most common type of spread which you need to pay money to put on. Hence a "Debit" to your account. This debit to your account is where the term "Debit Spread" comes from. Anyone with enough money to pay the debit can put on a debit spread. There are no margin requirements and is therefore the most popular kind of spread.

Read the full tutorial on Debit Spreads.




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What Are Examples Of Credit Spreads?
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What Are Examples Of Credit Spreads?
Here are some examples of Credit Spreads :

Vertical Spreads
Bull Put Spread
Bear Call Spread
Short Straddle
Short Strangle
Iron Butterfly Spread
Iron Condor Spread




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What Are Examples Of Debit Spreads?
Here are some examples of Debit Spreads :

Bull Call Spread
Long Straddle
Butterfly Spread
Long Strangle
Calender Call Spread
Bear Put Spread
Calender Put Spread
Collar
Condor Spread
Options Margin




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